A multi-euro future?

Photographer: Thomas Trutschel/Photothek/Getty Images

A Nobel Alternative to the Current Euro System

Leonid Bershidsky is a Bloomberg View columnist. He was the founding editor of the Russian business daily Vedomosti and founded the opinion website Slon.ru.
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A new book by Nobel prize-winning economist Joseph Stiglitz suggests that the best way forward for the euro area is a "flexible euro," a system of different currencies under the same name fluctuating within certain limits. It's a new, ingenious riff on an idea that keeps popping up in discussions of the currency bloc's future, but probably doesn't promise much improvement to the weaker European economies.

QuickTake The Euro

An excerpt from the Stiglitz book, "How a Common Currency Threatens the Future of Europe," published in Vanity Fair, frames the proposal as a compromise between a full European fiscal integration -- politically unfeasible today -- and a full breakup of the euro, with all the countries going back to their own currencies, which, according to Stiglitz, "could have profoundly negative consequences on many fronts." Euro-zone institutions, Stiglitz writes, aren't a total failure, but they are insufficient as a basis for a fully fledged single-currency system. The "flexible euro" would: 

create a system in which different countries (or groups of countries) could each have their own euro. The value of the different euros would fluctuate, but within bounds that the policies of the euro zone itself would affect. Over time, perhaps, with the evolution of sufficient solidarity, those bounds could be reduced, and eventually, the goal of a single currency set forth in the Maastricht Treaty of 1992 would be achieved.

It's easy to see why Stiglitz's proposal is better than a return to lire, pesetas and francs: If the new currencies are all called euros, the union is still together and its goal is unchanged -- but the benefits of separate currencies can still be enjoyed. One benefit, to be precise: the ability to devalue. "At the lower exchange rate," Stiglitz writes, "the countries of southern Europe (for instance, Greece and Italy) could export more and would import less. Demand would increase, and with it incomes and employment.

The flexibility would be limited by the "bounds" set by euro-area policies -- presumably a throwback to the pre-euro exchange rate mechanism or some new soft peg system. Such would be the price of preserving a semblance of unity. This is what sets Stiglitz's vision apart from previous iterations of the eurosplit idea.

In 2012, the British economist Roger Bootle won the Wolfson Economic Prize -- the second-highest award in the profession after the Nobel -- with a set of proposals on leaving the euro. He considered the possibility of splitting the united currency into a "northern" and a "southern" euro, but found it less advantageous than keeping a northern core of euro nations -- Germany, Austria, the Netherlands, Finland, Belgium and possibly France (but mainly for political reasons) -- and letting southern Europeans go back to their own currencies. They are, Bootle argued, not sufficiently interconnected for a united currency, and there would be no point in a country like Greece dragging the others down.

Stiglitz himself has called for Germany's exit from the euro, which he says would lead to a rise in the value of the reissued Deutsche mark and a fall in the euro. All these ideas are based on the premise that a devaluation would allow the weaker countries to increase exports and thus boost growth and employment. Germany, which has been doing just that for decades, would find itself at a disadvantage and stop exporting so much. "Germany’s huge trade surplus -- the major source of global imbalances -- would decrease," Stiglitz writes. "Germany would have to find another engine for its economic growth."

In theory, it all looks logical and fair, especially in Stiglitz's latter compromise proposal. But it's not clear it would work that well in practice. One reason is that Germany's exports haven't been fluctuating in line with the euro's exchange rate. In fact, in the 2000s, they went up as the euro appreciated, and after the global financial crisis, they took a dip along with the euro:

A Weak Euro Is Not Much Help
German exports and the euro's exchange rate, normalized to Jan. 1998
Sources: Bloomberg, Bundesbank

Nor has Germany been draining the juices from other euro-zone countries, exporting more to them but buying less in return. In fact, Germany's imports from the euro zone have been growing faster than its exports to the rest of the united currency area:

Not a Vacuum Cleaner
Germany's imports from other euro area countries have recently increased more than exports (data normalized to March, 1999)
Sources: IMF, Bloomberg

It's unclear how much a limited ability to devalue their currencies would help the weaker European economies. Europe's exports are far more sophisticated than those of commodity-based emerging economies. Italian, Spanish, French and German exporters don't just compete on price, and while lower exchange rates certainly benefit any exporter, they may not make enough of a difference to growth -- especially if the weaker currencies also mean much higher interest rates than the southern European economies enjoy thanks to the united currency.

In the book excerpt, Stiglitz discusses import substitution as a possible growth engine for a country such as Greece. Perhaps it would make sense to look at the example of Russia since the dramatic fall in the oil price to see how weak that engine can be. 

When oil crashed in the autumn of 2014, Russia quickly moved to unpeg the ruble from a basket of currencies -- going, in effect, with the Stiglitz recipe. The currency crashed, losing a third of its value between an October 2014 high and a January 2015 low. The central bank yanked up the lending rate. At the same time, the government decided to use the weak currency for import substitution, banning the imports of most Western agricultural products and processed foods, ostensibly in response to sanctions related to Russia's aggression in Ukraine. 

Russia's economy has since stabilized, but it's still in recession. The growth in some sectors helped by the import bans cannot compensate for the lack of investment in others caused by high interest rates, a depressed domestic demand and a nasty regulatory climate.

How much would the newly "flexible" euros printed by weak European economies help them? Probably less than a massive devaluation helped Russia. 

There are no simple solutions to the problems of southern European economies, wounded by decades of mismanagement, corruption, politically-motivated regulation, a lack of innovation and flagging attention to product quality. Monetary policy is not their biggest problem. Changing it without fixing the rest of the issues may set back European economic integration without producing much in the way of benefits. Easy solutions, though, will be proposed time and again.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Leonid Bershidsky at lbershidsky@bloomberg.net

To contact the editor responsible for this story:
Therese Raphael at traphael4@bloomberg.net